A clearer outlook for arbitration in India

Author: | Published: 23 May 2016
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Krishnayan Sen of Verus provides a detailed assessment of new Indian arbitration procedures and how they will work in practice

Verus
www.verus.net.in

The Arbitration and Conciliation (Amendment) Act, 2015 ushered in a new era in the arbitration regime with a slew of much-anticipated reforms of the country's arbitration law and practice. The reforms broadly seek twin objectives. First, to instil investor confidence in international arbitration, where the seat is in India, or when enforcement of a foreign award is sought in India. Second, to weed out the deep-rooted malaise that had crept into the arbitrations held in India, particularly problems associated with ad hoc arbitrations. Those problems include delays before, during and after arbitrations, arbitrators' inadequate disclosure norms, arbitrators' arbitrary and exorbitant fees, the awarding of costs and interest, and the lack of professionalism of the arbitrators. The central theme of the reforms is quite evident, and the salient features are discussed below.

International arbitration in India

One important criticism of the earlier law was that international arbitrations, when held in India, would be subject to the same level of judicial scrutiny as domestic arbitrations – thereby derailing the entire arbitration process. The present reforms seek to make several important changes in this regard.

Higher judiciary only

The jurisdiction to hear all questions relating to international commercial arbitrations in India, except for the appointment of an arbitrator, will now be mandatorily vested in a High Court, and not be heard by any lower court – as was the case previously. Therefore, all questions pertaining to the granting of interim relief, assistance in taking evidence and challenging of an award will now mandatorily be heard by the High Court. However, the appointment of an arbitrator in an international commercial arbitration will only be done by the Supreme Court.

Arbitral tribunal fees

A schedule of fees for arbitrators has been laid down for all ad hoc arbitrations, except for international arbitrations. What this implies, is that for international arbitrations in India, the statutorily prescribed fees would not apply. This exclusion recognises the fact that international arbitrations ordinarily involve much higher stakes and complexities and, therefore, require leading international arbitrators to be appointed as arbitrators. Therefore, any prescription or regulation of fees in such cases would be counter-productive and act as a deterrent to leading international arbitrators from accepting appointments in India.

Limiting the grounds of public policy of India

The Supreme Court of India, in its famous ruling in ONGC v Saw Pipes (2003) held that an award could be set aside on the grounds of public policy if the award suffered from a 'patent illegality'. This effectively added a fourth test to the public-policy challenge following the three tests already laid down in the earlier judgment of Renusagar Power v General Electric (1993), namely:

  • fundamental policy of Indian law;
  • the interests of India; or,
  • justice or morality. In view of this additional fourth test of patent illegality, many well-fought, hard-won international awards were getting set aside by the Indian courts mainly on the grounds of erroneous application of law.

This began to severely erode investors' faith in the Indian judicial system to honour and uphold such awards often passed by distinguished tribunals. Addressing these concerns, the present amendment has rightly clarified that the grounds of patently illegality in challenging an award can only occur in the case of domestic arbitrations and not international arbitrations held in India. An award passed in an international arbitration held in India can only be set aside on the grounds that it is against the public policy of India if, and only if:

  • the award is vitiated by fraud or corruption;
  • it contravenes the fundamental policy of Indian law; or,
  • it is in conflict with basic notions of morality and justice.

While these three sub-grounds are themselves quite vague and open-ended, what is clear is that an award passed in an international arbitration in India can no longer be challenged merely on the grounds that there has been a misapplication of law or an erroneous appreciation of evidence.

Interim relief in foreign arbitrations – reconciling Bhatia and Balco

Those familiar with the contentious Bhatia versus Balco debate will breathe a sigh of relief, as the amendments seek to end the dual-regime that has existed following the Balco verdict, with respect to the Indian court's jurisdiction over international arbitrations outside India. The Supreme Court, in the Balco judgment (2012), overruled its earlier decision in Bhatia International (2002) and held that part I of the Arbitration Act (dealing with arbitrations held in India) would not apply to arbitrations held outside India. However, Balco held that it would only apply to agreements that were executed after the date of the judgment, that being September 6 2012. Unfortunately, the Balco judgment thereby created a dual-regime wherein disputes arising from all agreements entered into before September 6 2012 would continue to be governed by the earlier Bhatia International judgment, which had held that part I of the Arbitration Act (dealing with arbitrations held in India) would equally apply to arbitrations held outside India unless the application had been excluded – either expressly, or by necessary implication.

While the Balco judgment was generally well-received by the arbitration and investor community, which had become wary of over-interventionist Indian courts setting aside hard-fought awards, there were two important limitations in the Balco judgment: there was no scope for obtaining or enforcing any interim orders, if either party needed any interim or provisional protection; and, there was no scope for seeking an Indian court's assistance in taking evidence, where necessary.

Since the Balco case had entirely denuded the Indian courts' jurisdiction in all matters relating to foreign seated arbitrations, parties were neither able to enforce interim directions or orders passed by the foreign tribunal nor could they approach the Indian courts seeking interim measures or assistance in taking evidence. The present amendment, by the insertion of a new proviso to sub-section (2) of section 2, seeks to address that lacuna by reverting, in part, to the Bhatia principle. In other words, only two provisions in part I of the Act – those pertaining to the court's power to grant interim reliefs (section 9) and rendering assistance in taking evidence (section 27), along with their respective appeal provisions – will apply to international arbitrations held outside India, unless where parties, by agreement, have excluded the applicability of those provisions. Therefore, unless parties specifically exclude the application of section 9 and section 27 of the Act in the arbitration agreement, the Indian courts will continue to have jurisdiction to pass interim relief or assist in taking evidence, even in international arbitrations outside India. This, therefore, addresses the problems posed following the Balco ruling, and also ends the anomalous dual-regime that was prevalent. The objective of the provision appears to provide an enabling clause to parties who might require an Indian court's assistance in aid of an international arbitration outside India.

Practitioner's dilemma

Where an arbitration seat is outside India, practitioners need to carefully consider at the time of drafting an arbitration clause whether to exclude the applicability of section 9 and section 27. Failing to do so would imply that Indian courts would retain jurisdiction to grant interim relief and assist in taking evidence, as now inserted in the proviso to sub-section 2 of section 2. Needless to add, this would only apply in cases where there is some Indian element in the dispute (that is, either one of the parties is an Indian entity, or the subject matter of the dispute is in India) and where Indian courts would, but for the arbitration clause, have jurisdiction.

India-seated arbitrations

The government had clearly done its homework on the components and practices that were crippling India's arbitration regime, and this is reflected in the robust reforms that have been introduced in the administration of arbitrations in India. Some of the broad themes are described below.

Speed and time are of the essence

The primary criticism of the Indian arbitration regime was that arbitrations, especially ad hoc arbitrations, which continue to form the majority of arbitrations held in India, were unduly protracted affairs. This nullified the very reasons why parties chose an alternate dispute resolution mechanism in the first place. The reforms seek to address this problem by: (i) setting time limits (a 12-month period) when arbitrations need to be concluded and awards need to be delivered; (ii) putting the onus on the arbitral tribunal to conclude the arbitration; (iii) if an award is not made within 12 months (or a further extended period of six months – if parties consent), then the arbitrator's mandate will automatically stand terminated; (iv) after the period of 12 months (or extended period of six months – if parties consent), only courts can extend the timeline for the completion of the arbitration; (iv) prescribing for day-to-day hearings (as opposed to after-court sessions of just a few hours), no routine adjournments, and providing for the imposition of exemplary costs on any party to punish it for any delay; (v) rewarding arbitrators, with additional fees, for completing arbitrations within six months, and punishing arbitrators, by fee reduction or even substitution of the arbitrators, for undue delay in arbitrations. This feature of imposing statutory timelines on arbitrations will render India unique in the world of international arbitration.

Fast-track procedure

The amendment introduces an entirely new expedited or fast-track mechanism, akin to many institutional arbitration rules, for completing arbitrations within a period of six months. This essentially gives parties the option to adopt an expedited resolution mechanism where the disputes can be decided based on documentary evidence alone. The tribunal may call upon the parties for oral hearings, if necessary. However, the main purpose of having this new provision is to quickly resolve the disputes between the parties where an elaborate trial is not necessary.

Limited role of court in granting interim relief

The court's role in granting interim relief has been reduced and transferred to the arbitral tribunal. The amendments provide for the constitution of the tribunal within 90 days from the date of any interim order passed by the court. This seeks to address a malpractice that had crept into the system, wherein parties would seek interim orders from courts and, having received them, would deliberately delay in commencing the arbitration process. The amendments also stipulate that once the arbitrator is appointed, the courts would, ordinarily, not entertain any application for interim relief. This practice is, in fact, already being followed by many high courts, like the High Courts of Delhi and Bombay. A direction is given to the arbitrator to treat the section 9 application as an application under section 17 (which confers power on an arbitral tribunal to pass interim directions and orders).


"This imposition of statutory timelines on arbitrations will render India unique in the world of international arbitration"


Interestingly, the amendment introduces a new provision, namely, section 17, which now confers power on the arbitral tribunal to consider applications for interim relief – not only during the arbitral process, but also after the award is made but before it is presented for enforcement. This departs from the long-held position that the arbitral tribunal will be functus officio and its mandate will stand terminated with the delivery of the final award. Unfortunately, there appears to have been an oversight by the draftsman in as much as section 32(3) of the Act – which provides that the arbitrator's mandate will stand terminated with the rendering of the award – has not been suitably modified or amended to allow for and save the arbitrator's power to pass interim directions even after the final award is made.

Disclosure obligations on the arbitrator

In terms of sheer space, it seems the maximum number of amendments have been introduced, providing for a detailed laundry-list of disclosure obligations on the arbitrator. Two new schedules have been introduced: (i) schedule 5 sets out the grounds that could give rise to justifiable doubts as to the impartiality and independence of the arbitrators; and, (ii) schedule 6 sets out the disclosure certificate which the arbitrator is required to furnish to confirm that there is no conflict in acting as an arbitrator. Schedule 5 sets out the grounds under key heads such as: (i) the arbitrator's relationship with the parties or counsel; (ii) any relationship of the arbitrator to the dispute; (iii) the arbitrator's direct or indirect interest in the dispute; (iv) previous services for one of the parties or other involvement in the case; (v) a relationship between an arbitrator and another arbitrator or counsel; (vi) the relationship between arbitrator and party and others involved in the arbitration; and, (vii) other circumstances, for example if the arbitrator holds shares with one of the parties or the arbitrator holds a position in the arbitration institution which is the appointing authority over the dispute. While the draftsman may have generously borrowed the conflict-principles from the leading arbitration institutions, what is important is that the entire objective is to ensure greater credibility in terms of the independence, impartiality and neutrality of the arbitral tribunal; and thereby instil confidence in end-users. The law also recognises, for the first time, the influence, contribution and role of law firms in the arbitration process. It recognises law firms and arbitrators as vital stakeholders in the arbitration process which, in the author's view, is essential if the alternative dispute resolution process is to flourish in India.

Regulating arbitrators' fees

The law now lays down detailed guidelines, in the newly introduced schedule 4, on the prescribed fees of arbitrators. While this may come in for some level of criticism from the arbitrator community, it will certainly introduce a degree of certainty, and relief, among users who are often left to the complete mercy of arbitrators, often retired Supreme Court and High Court judges, charging exorbitant fees under different heads. Consequently, arbitrations in India were neither quick nor cost-effective. Parties, in fear of inviting an adverse decision from the arbitrator, were in no position whatsoever to discuss or negotiate fees with the arbitrators. Therefore, costs of arbitrations, including venue and secretarial costs, would often run up to unusually high, almost extortionate, levels. It is important to note that this prescription of fees does not apply to international arbitrations and administered/institutional arbitrations.

No automatic stay on enforcement of awards

Another important, though expected, amendment is the lifting of the automatic stay on enforcement of awards upon the filing of a challenge to the award. No other provision has been abused more than this blanket immunity which the losing party would enjoy upon filing an application for setting aside the award. The winning party after a long hard-fought and well-reasoned arbitral award would routinely languish for years without any hope of the award's enforcement, waiting for the challenge to the award to be disposed of; and then suffer multiple levels of appeal. It would frustrate the winning parties, often to the delight of the losing party, who used the legal quagmire to either make ridiculous 'settlement' offers or further protract the proceedings. The author would argue that this one provision rendered the entire arbitration mechanism a farce; and it is incredible that it took this long to finally amend it. Under the new reforms, the mere filing of a challenge would not grant an automatic stay of the enforcement of the award; but the losing party would have to file an application for stay of the award and satisfy the court that a stay should be granted. The court may also order to secure the awarded amount by directing the losing party to make a full deposit of the awarded amount in court to obtain a stay on enforcement of the award.

Other important changes

Among the other important amendments, are: (i) an entire new regime of costs. The new section 31A, has been provided – essentially adopting the loser-pays or costs-follow-the-award principle – wherein the tribunal is empowered to make a detailed ruling on awarding costs upon the parties; (ii) the award will carry, unless the award otherwise directs, interest at the rate of two percent higher than the prevailing rate of interest on the date of the award, payable from the date of the award to the date of payment; (iii) the words 'Chief Justice' in section 11, that is, a provision for the appointment of an arbitrator in the case of default of the parties, has been replaced by 'Supreme Court' and 'High Court'. This avoids the needless confusion that the intended role of the Chief Justice had created and which was finally put to rest by the Supreme Court in the Patel Engineering case in 2005; (iv) it has been clarified that the grounds of 'patent illegality' cannot be used to set aside awards merely on the grounds of an erroneous application of law or by re-appreciation of evidence. However, in the author's opinion, this means that courts would have to amplify and expound as to what would in fact construe a 'patent illegality'. It seems that more objective tests are needed setting out what events would be construed to be a patent illegality. If not, there is a danger we would only see a repeat of a long line of puzzling case-law setting out, on an ad hoc basis, what constitutes patent illegality.

Outlook

The reforms will not only restore investor confidence in the Indian judicial system, but also have the potential to transform India into a preferred regional arbitration hub. However, to attain that potential, India needs to develop its own international arbitration institution – on the lines of SIAC, LCIA, HKIAC and KLRCA – and develop a professional autonomous setup which instils confidence in its users. While we hope to obtain some clarity on this shortly, the Amendment Act is certainly a watershed for Indian arbitration jurisprudence, in as much as it lays down the foundations for building a progressive and vibrant statutory ecosystem to resolve business disputes in a speedy and efficacious manner.

About the author
sen  

Krishnayan Sen
Partner, Verus

New Delhi, India
T: +91 11 26215601
F: +91 11 26215603
E: krishnayan.sen@verus.net.in
W: www.verus.net.in

Krishnayan Sen is a partner at Verus and heads the firm's disputes practice. He has been a trusted adviser to a diverse range of clients, including international corporations, government undertakings, banks and statutory authorities. He is a versatile litigator, having regularly represented clients across different courts and tribunals. He is also an advocate-on-record at the Supreme Court of India and has appeared in several leading cases.

His recent cases include successfully representing United Bank of India against Kingfisher Airlines and Vijay Mallya at the Supreme Court of India in recovering its dues of $60 million (awarded deal of the year by the India Business Law Journal); successfully defending McDonald's in relation to the accounting method of rounding-off followed in its chain of restaurants; advising Schlumberger in a public procurement tender involving about $35 million; advising UBER in actions for defamation against a regional media house; successfully representing Huntsman International in recovering its contractual claims against a vendor before the Delhi High Court; advising GE Healthcare in an arbitration involving a claim for personal damages; and, advising Kotak Mahindra Bank in defending secured creditor's rights under the Securitisation Act before the Supreme Court.

His principal areas of practice include international arbitration, corporate-commercial disputes and banking litigation. He is fluent in English, Hindi and Bengali.


 

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